Three Changes to Cost Recovery Under the Tax Cuts and Jobs Act
By Lory H. Kelley, CPA, Partner
The Tax Cuts and Jobs Act, signed into law December 22, 2017, produced the largest overhaul of the Internal Revenue Code in recent memory. The impact was broad, and virtually all aspects of taxation are affected in some way. One intent of this tax bill was to stimulate the economy, and we can see this goal manifested through three modifications to the cost recovery rules for fixed asset additions. Unless otherwise noted, these tax law changes are in effect for tax years beginning in 2018.
Section 179 Deduction: The ability for a taxpayer to immediately expense qualifying business assets is broadened by raising the Section 179 deduction limit from $500,000 to $1,000,000. In coordination, the Section 179 deduction investment limitation for qualifying property placed in service during the tax year is increased to $2.5 million from $2.0 million.
The law also expands the definition of eligible property to include residential rental real property and qualified real property. Qualified real property includes qualified improvement property (defined below) as well as roofs, HVACs, and fire protection, alarm and security systems on nonresidential real property purchased after the building is first placed into service. Qualified improvement property is a new term meant to replace the old definitions for restaurant, retail, and leasehold improvements and refers to an improvement made to an interior portion of nonresidential real property after the building has been placed into service. It specifically excludes enlargements of the building, elevators and escalators, and the internal structural framework of a building. These alterations to Section 179 are permanent changes to the tax code.
Bonus Depreciation: The new law both modifies and extends bonus depreciation by permitting businesses to deduct 100% of the cost of qualifying property with a depreciable life of 20 years or less for assets purchased after September 27, 2017 and before January 1, 2023. Assets bought before September 28, 2017 are subject to the old rules. After 2022, the bonus depreciation percentage phases down until it is completely eliminated after December 31, 2026.
An exciting addition to property qualifying for bonus depreciation is used property. Under old law, only newly manufactured assets were eligible for bonus depreciation. To properly qualify, the used property must be acquired through purchase, and the taxpayer could not have used this property at any time before acquiring it (such as through a rental agreement).
Luxury Auto Limitations: Depreciation expense limits have quadrupled for vehicles considered luxury autos with the new tax law. The new limits outlined below in essence raise the purchase price of a what is considered a luxury auto from $18,600 to $50,000.
Tax Year 1 $10,000 ($18,000 if bonus depreciation claimed)
Tax Year 2 $16,000
Tax Year 3 $9,600
Tax Year 4 (and thereafter) $5,760
In summary, there have been substantial changes to the Section 179 deduction, bonus depreciation, and luxury auto depreciation. The appropriate application of these various cost recovery methods will result in substantial reductions of a business’s taxable income. Do you know how your current year fixed asset additions will impact your tax liability?
Lory H. Kelley Managing Partner, Tax Partner, CPA
Lory is Bernard Robinson & Company’s Managing Partner with over 20 years of experience in public accounting serving clients and in firm leadership roles. She has experience working in many industries, including residential and commercial real estate and general and specialty contractors. She applies her knowledge and practical ideas to meet the needs of […]